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The Pros and Cons of Fixed Annuities

The Pros and Cons of Fixed Annuities

The precarious condition of the U.S. economy and stock market is causing many Americans to lose their confidence in being able to sufficiently fund their retirement years. According to the 2011 Employee Benefit Research Institute study, Americans’ confidence in their ability to afford a comfortable retirement has fallen to a new low. In fact, the percentage of workers who were not at all confident about their financial security in retirement grew from 22% in 2010 to 27% in 2011.

Generally speaking, a chaotic economy will have the largest affect on individuals that have small tolerances to risk and that have a limited time
horizon in front of them, such as individuals about to retire. Since fixed annuities offer stability and the potential for growth, but don’t involve the individual assuming a lot of the risks associated with the financial market, many individuals nearing retirement find them very attractive and valuable. Of course, soon-to-be-retirees aren’t the only investor group that will find the guaranteed stability and returns of a fixed annuity attractive in such an unstable economy.

Like any investment, fixed annuities have both pros and cons. Any consumer considering purchasing a fixed annuity should consider both sides very carefully:
Pros

1. Fixed annuities feature guaranteed returns. During the accumulation phase of an annuity contract, the insurer guarantees a minimum rate of return.

2. An unpredictable market is a moot issue for a fixed annuity owner. Market volatility has absolutely no bearing on the rate of return since the insurance company is obligated by contract to meet the minimum rate of returns.

3. An annuity owner will not be taxed on annuity gains until they actually withdraw the money. Other financial vehicles, such as CDs, are taxed based on the interest it earns during the year.

4. Just like with a CD, the consumer can lock a set rate of return in for a set number of years.

Cons

1. All of the above pros aren’t without sacrifices being made somewhere. The rate of return will be more conservative than gains from the financial market.

2. It’s more difficult to liquidate fixed annuity assets because they offer a locked-in rate of return. There may also be surrender charges during the surrender of an annuity. Any withdrawal from an annuity will be taxed like regular income. If the funds are withdrawn before the individual reaches 59 1/2-years-old , then the withdrawal could be subject to a federal income tax penalty of ten percent.

When all is said and done, a fixed annuity might not be the best option for those looking to make big money at a big risk. On the other hand, a fixed annuity could be the ideal option for those looking to add stability and modest guaranteed returns to their portfolio. An experienced financial planner or adviser can address any additional concerns or questions.

Call Brian Gruss 509-927-9200

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.